How does the Fiscal Cliff effect my real estate investments?

My clients that own appreciated second homes or investment real estate have been asking me the question: “How does the Fiscal Cliff effect my real estate investments?”
My response to them has been: “It depends”. It depends on whether the current long term capital gains rate, which is 15%, will be allowed to expire and thereby causing the automatic reinstatement of the Pre Bush-Era long term capital gains rate of 20%.
As the Democrats and the Republicans attempt to reach an agreement that will prevent the Fiscal Cliff from taking place we should understand that the compromised “solution” may not include a continuation of the 15% long term capital gains rate.
Selling real estate just because of a potential change in the long term capital gains rate should be carefully analyzed. If a transaction is already in process it may not be unreasonable to move the closing from 2013 to 2012. However, moving a gain from a transaction into an earlier year is generally ill conceived.
Trying to achieve a quick sale of real estate in an attempt to take advantage of a lower tax rate oftentimes results in a sale under less than optimal terms and therefore should be avoided.
One thing for sure is that we will be witnessing a very high stakes game of chicken as the Republicans and Democrats attempt to avoid the Fiscal cliff.

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